After the Financial Crisis, A Decade of Damage

Adam Tooze’s new book traces today’s political breakdowns to the 2008 crash.

August 20, 2018

We already know much of the story that
Adam Tooze tells inCrashed: How a Decade
of Financial Crises Changed the World, his ambitious study of the causes
and effects of the financial meltdown that caused the Great Recession. The
opening pages of his book recount the events of September 16, 2008, “the day
after Lehman.” In a matter of hours, the Dow Jones plummets “778 points, wiping
$1.2 trillion off the value of American businesses.” The entire financial
system begins to unravel and it becomes clear that the mortgage-based CDOs and
credit default swaps that underpinned world banking are nearly worthless. Mutual
funds pull back from investing and banks face an immediate shortage of funding.
World lending begins to freeze altogether. European countries face capital
shortages. The entire world economic system is on the edge of collapse.

CRASHED: HOW A DECADE OF FINANCIAL CRISES CHANGED THE WORLD by Adam ToozeViking, 720 pp., $35.00

But Tooze is not simply telling a story
of the financial crisis. Crashed is
also the tale of the political intricacies of the crash, the ensuing bailout,
and of the great political unraveling that has followed. He documents the
descent into recession in 2008 as housing values plummeted and the average
net worth of the middle class American household halved from $107,000 to
$57,800 in a year. American car sales came to a near halt, sending a reaction through
the global manufacturing chain. Chrysler and General Motors teetered on
bankruptcy; Mexico, a major center in North American car manufacturing, reeled
as its non-petroleum exports dropped by 28 percent and its GDP contracted 7
percent over the year. By 2009, the crisis had spread worldwide, with Germany’s
exports falling 34 percent. GDP dropped around the world and a credit crunch
caused poorer, over-indebted European nations like Portugal and Greece into virtual
bankruptcy.

Although the bailout of American
investment banks prevented total world economic meltdown, it did not instill
the public with trust in the government or institutions. Their failure to
prevent massive declines in the standard of living would discredit
establishment politicians on both the center left and right. Whereas average
citizens lost huge chunks of their wealth and buying power, the banks got a bailout
and the people responsible for the crisis walked away, not only without jail time
but, in many cases, with handsome golden parachutes, funded by taxpayer money.

What looked like an American mortgage
debacle ended up as a world financial crisis that has shaken the foundations of
liberal democracy from Washington and Rome to Istanbul. Tooze shows the global
nature of financial and political breakdowns, which have otherwise been linked
to local factors. Although it is a stretch to compare Turkey and former eastern
bloc countries to the UK, the US and Italy—where liberal democracy is under
attack, but has not yet ceased to function—what this book makes clear is that
one more crash could very well be the tipping point for Western democracy.

A scholar of early twentieth century
European economic history, Tooze has chosen here to write a history of the
recent past on a global scale. To regular readers of the Financial Times, or of IMF, OECD, World Bank, and European
Commission reports, most of the details in this book will be familiar. But it
is the configuration of Tooze’s analysis that is novel—he darts from the crisis
in Washington to monetary politics in Europe, and on to Chinese fiscal policy
to explain how interconnected each of these countries’ economies are. This
sends a clear message to those who believe in nationalist economic policies: We
are all in this together, to a greater extent than financial institutions and
governments have made clear.

Many see the origins of 2008 inAmerica’s deregulated and
undercapitalized banks. There is no question that they created a mortgage
crisis that morphed into a financial crisis as toxic subprime CDOs—a financial
product of mortgage, mortgage insurance, and bonds pooled together as
collateral for the product itself—became worthless. American banks were
overleveraged at 20:1 in subprime assets, which means that for every 20 dollars
of risk investment, they held, by US law, only one dollar of actual capital guarantee.
But, Tooze seeks to demonstrate, the crash was not solely about the United
States; it was an international phenomenon.

The American financial playing field,
he shows, was designed in great part by Europeans in the 1980s. When German,
Swiss, French and Dutch banks began to buy into the city of London as a
“springboard” to US markets, they also developed and spread the dangerous CDO
products. And, as the economists Anat Admati and Martin Hellwig have long
shown, European banks were even more undercapitalized than the Americans with
Deustchebank, UBS and Barclays averaging 40:1 risk exposure. Tooze makes a convincing
case that the crash came from a failure of international regulation and the
lack of political willto limit a
dangerous system of financial risk.

Tooze is careful to show that the crash
was not simply the fault of banks and regulators. National governments also
flouted financial responsibility at every level. Starting in 1995, many
European countries began an unsustainable borrowing spree that began in 1995 and
continues to this day in the US, Europe and beyond. As Tooze shows, debt-to-GDP
ratios have skyrocketed in Europe. In Spain, Portugal and Greece debt went from
the EU stipulated maximum of 60 percent of GDP to well over 100 percent. The
same was happening in Italy and France, and indeed, the US and Japan. This meant
that even major countries could not, and still cannot, realistically pay off
their debt.

What Tooze does not say is that most
countries are much poorer than they think they are. They face the daunting
challenge of somehow convincing their publics to cut spending and raise taxes
or face downgrades, defaults and more financial crises. The likelihood of future
crashes may be even greater than he suggests.

Tooze’s most insistent point is that the
2008 crash created the conditions for “illiberal democracy.” The success of the
Tea Party and the American far-right, he argues, grew directly from it: Once
George W. Bush, Treasury Secretary Hank Paulson, and Federal Reserve Chairman
Ben Bernanke realized that they needed to spend $700 billion to nationalize the
American financial system, their own party revolted against them. Most
Republicans flatly rejected the bailout and refused to vote for it. Of the 205
votes in favor of the Troubled Asset Relief Program, “140 came from the
Democrats and only 65 from the Republicans. Of those opposed, 133 were
Republicans and 95 Democrats.” These facts are worth revisiting, because, as
Tooze tells it, those who refused to vote for TARP would pave the way for the
reactionary House Freedom Caucus that has steadfastly stood by Donald Trump.

The links between the financial crisis
and the rise of neo-fascism in Hungary and Poland are similarly clear. Both
countries had entered European capital markets not with the euro but with their
old currencies, the forint and the zloty. Vulnerable and small, Hungary had
taken much of its national and household debt in Swiss francs. As the forint
collapsed and the franc grew in the wake of the crisis, Hungary and its
companies and homeowners found themselves nearly ruined by far-away forces that made
their debts untenable. Hungary was “humiliated” by favorable but intrusive IMF
and EU loan assistance, which many in Hungary thought made Hungary a colony of
the EU and interests of international capital.

To nationalists and those who lost
their savings and houses, it was reminiscent of the Trianon Treaty of 1920,
which saw the big powers of Europe amputate 70 percent of Hungary’s landmass and
75 percent of its population. The far-right Fidesz party, led by Victor Orbán, used
anti-Semitic specters of foreign bankers and Jewish conspiracies bringing down
Hungary, and set up a home base for what is politely known today as the alt-right.
Poland followed suit, though later, with its own shift to Catholic, authoritarian
nationalist government.

Of course this does not explain why
hard-hit countries such as Spain, Italy, Portugal and Greece did not turn to
extreme reactionary governments. Italy re-elected Silvio Berlusconi in 2008,
and in 2011 elected a series of moderate center and center-left governments,
only voting in a nationalist, xenophobic, pro-Russian government this year,
after a long simmering migration crisis. Meanwhile, Spain and Portugal have
opted for traditional, moderate parties, and Greece chose the democratic
socialism of Syriza. Tooze leaves unanswered the question of why the crash
pushed some countries to a threshold of intolerance and authoritarianism while
others have so-far resisted. Nor does he explore the possibility that the crash
only exacerbated existing tendencies, rather than wholly reshaping the politics
of the countries hit hardest.

Tooze is a master of the modern
financial report and his book is built on a dizzying array of expert reports,
studies and Financial Times and Economist articles. He is the financial
reader’s reader. But this poses some issues: He often enthusiastically follows
the official accounts of the most famous leaders, press releases and reports
from the OECD, the IMF, the World Bank and the credit ratings agencies. By
sticking to the official lines and citing usually the most glamorous figures, he
can overlook the fine grain of what actually happened.

Take for example his reading of former
Greek finance minister Yanis Varoufakis’s telling of the Greek debt crisis.
Varoufakis claimed that the Germans had offered Greece unsustainable debt and
publicly humiliated and crushed the country.
Few can argue with that. But Tooze never mentions Varoufakis’s disastrously
undiplomatic insistence on calling creditors immoral during negotiations
(Greece too had its share of blame in the crisis), revealing the closed
discussions, violating rebate agreements, and attacking creditors, while
threatening to pull out of the monetary union. It served instead to spook
creditors and the markets, and to cause a bank run, capital controls, and the
loss of tens of billions of euros from the already bankrupt Greece. By treating
sources like Varoufakis uncritically, Tooze simply misses the real story.

Alan Greenspan, Larry Summers, Hank
Paulson and George W. Bush—who gutted the SEC—are portrayed as cool and potentially
heroic decision-makers in the face of crisis.

Tooze’s account of German economic
policy is also relatively superficial, relying on sources such as “the official
chronicle of the German finance ministry” and a small sample of news articles.
He does not compare various arguments or versions of what happened. This means that rather than critical analysis, we get instead an anodyne summary. Tooze
rightly recognizes that Germany’s loans to Greece, Italy, Portugal and Spain
helped stabilize German export markets. What he does not say is that while
claiming to be a victim of Greece’s profligacy, Germany benefitted from the
Greek and southern European debt crisis to an extent that some might find
morally dubious.

By causing chaos and uncertainty in the
Eurozone, the Greek crisis lowered the value of the euro, and ostensibly allowed over-indebted southern
European countries to borrow more at lower cost so they could afford to buy
more German goods, which propped up German industry. All
the while, this drove down Germany’s own interest rates in relation to other
countries, allowing them to undercut Italian and French firms, while, at the same
time, snapping up Greek assets for next to nothing, and profiting from Greek
interest payments to help their own struggling banks. This is the kind of
information one can dig out of a critical analysis of the sources, but it
requires a willingness to question many of the Olympian authorities on which Tooze
relies. That willingness is essential in the difficult historical process of
assessing testimony.

In the end, Tooze does not give a clear
sense of exactly who caused the crisis. Even Alan Greenspan, Larry Summers, Hank
Paulson and George W. Bush—who gutted the SEC and made it even harder to see
and manage potential fraud and crisis—are portrayed as cool and potentially
heroic decision-makers in the face of crisis. Avoiding any specific criticism,
Tooze, for the most part, constructs a play-by-play narrative. The same is true
when he looks to the future: He rightly warns that national hubris in China
could be the source of the next crisis, but has little more to say about who
might contribute to this or how.

By his account, we are powerless to
control the invisible hand of the global financial system that will bring us
another crisis, and we can only react, as Paulson did. “These crises are hard
to predict or define in advance,” Tooze writes,

They
are not anticipated and often deeply complex … And they demand action. It is this juxtaposition that frames the
narrative of this book: large organizations, structures and processes on the
one hand; decision, debate, argument and action on the other.

There is truth in his depiction of the
unwieldy behemoth of global finance. And yet, we know the culprits in this
story: investment banks, those who are supposed to regulate them, and the states
that take unmanageable debt. We also know that good, unbiased financial
auditing is an old and effective tool for measuring risk, debt and
capitalization, as are good public financial management and well-designed
financial regulations, which were peeled away from the 1990s onwards. As
powerless as one might feel, jail time for bankers guilty of misconduct is a
deterrent that has not yet been tested. It might just work.

Indeed, Tooze’s book makes it clearer
than ever that effective regulation is needed. In this light, the recent
bi-partisan repeal of the Dodd-Frank Act, created to reign in many of the
excesses that caused the crash, looks all the more ominous. And while China
risks an unforeseen crisis, Tooze suggests that stable and well-capitalized
banks would be more able to weather another crash. Our future is not completely
decided by an irrational market. Yet a public that no longer believes in the
law’s capacity to protect it from the market will turn to terror, autocracy and
technocracy over democracy. That is a chilling and convincing conclusion.